EDITOR’S NOTE: The following is the twelfth in a series of articles giving an introduction to the Federalist Papers, a collection of 85 articles and essays written by Alexander Hamilton, James Madison, and John Jay promoting the ratification of the United States Constitution.
In Federalist #11, Alexander Hamilton argues that a unified America under the Constitution will allow the country to grow into an economic power. In Federalist #12, he builds on his case to address one of the primary issues facing the United States under the Articles of Confederation – the difficulty in raising revenue for the general government.
Congress could not tax under the Articles of Confederation. It relied on the states to pay into the treasury based on requisitions. But it lacked any enforcement authority. States tended to contribute to these requisitions slowly, and sometimes not at all.
In 1783, the Board of Treasury issued a report warning of dire consequences. It declared without state action, “…nothing…can rescue us from Bankruptcy, or preserve the Union of the several States from Dissolution.”
That same year, Congress drafted an address to state legislatures.
“A reliance on the requisitions to discharge the engagements of the confederacy, would be dangerous to the welfare and peace of the Union: That for want of timely exertion in establishing a general revenue, not only the existence of the confederacy was hazarded, but those great and invaluable privileges for which they had contended.”
Having established in the previous essay that American commerce would flourish under the proposed Constitution, Hamilton argued the power to tax that trade would solve the revenue problem.
“The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury.”
Hamilton approaches his argument in a very crafty manner, not only addressing the obvious issue of revenue generation, but also undercutting another prominent Anti-Federalist position, writing “…it is impracticable to raise any very considerable sums by direct taxation.”
He goes on to assert that the primary source of revenue under the Constitution will flow from duties on imported goods. Hamilton points out state treasuries depending on direct taxation remained empty despite multiplying tax laws and new methods of enforcement. Even in Britain, a more opulent nation “where direct taxes from superior wealth must be much more tolerable,” very little revenue derives from direct taxation.
“…far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises. Duties on imported articles form a large branch of this latter description.”
This tact serves as a subtle rebuttal of Anti-Federalist sentiment against the power of direct taxation. A dissenting address signed by 21 of the delegates who voted against ratification in Pennsylvania called direct taxes a tool of despotism.
“The power of direct taxation applies to every individual, as congress, under this government, is expressly vested with the authority of laying a capitation or poll tax upon every person to any amount. This is a tax that, however oppressive in its nature, and unequal in its operation, is certain as to its produce and simple in its collection; it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head. This tax is so congenial to the nature of despotism, that it has ever been a favorite under such governments.”
But Hamilton writes, “In America, it is evident that we must a long time depend for the means of revenue chiefly on such duties [on imported items].” By downplaying the role of direct taxes, he undercuts this concern while buoying his previous arguments in Federalist #11 relating to commerce.
Hamilton goes on to turn the Anti-Federalist contention against them, arguing disunion would actually lead to despotism. He contends the ease of smuggling would “insure frequent evasions of the commercial regulations” levied by individual states. That in turn would require the army to secure fiscal regulations, as was the case in France. Hamilton warns that with disunion “the States should be placed in a situation, with respect to each other, resembling that of France with respect to her neighbors.”
“The arbitrary and vexatious powers with which the patrols are necessarily armed, would be intolerable in a free country.”
Hamilton concludes by asserting a strong union under the Constitution will avert these potential problems.
“It is therefore evident, that one national government would be able, at much less expense, to extend the duties on imports, beyond comparison, further than would be practicable to the States separately, or to any partial confederacies.”
This essay likely played well with Hamilton’s readers. The inability of Congress to raise revenue was arguably the most widely acknowledged weakness under the Articles of Confederation. As Hamilton put it, “A nation cannot long exist without revenues. Destitute of this essential support, it must resign its independence, and sink into the degraded condition of a province.”